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Friday, June 01, 2001

I, Pepsi

One of Frédéric Bastiat’s great insights into understanding economics was to distinguish what is seen from what is not seen. Searching out the unseen is in many ways the essence of economics.

A soda bottling plant may seem like a strange place to do economics, but come along with me and take a look at what is seen. Here’s what a typical plant might look like. The first thing you notice is the size. It’s an enormous room—it feels like a football field with a big roof. At one end of this enormous room are rows and rows of finished soda in liters and cans, on pallets, stacked to the roof, ready to be loaded onto trucks. Then there are rows and rows of empties ready to be filled. And there is a massive roller coaster-ride structure that takes the empties into the filling room and back out to be assembled into six packs and cases.

The filling room is walled off in glass from the rest of the facility. The empty cans enter through a gap in the glass and are loaded onto a giant roulette wheel-like structure with a diameter of maybe ten feet. The empties ride along the edge of this wheel and over 100 nozzles come down and fill them with soda. Then they’re spun off the wheel to be pushed into six packs.

And here an amazing thing happens. Right after the just-filled cans are spun off the wheel, you want to make sure that the can is filled correctly. Sometimes the nozzles that fill the cans get clogged. Have you ever opened a can of soda to find it only half-filled? I’m sure it has happened, but for most consumers, it must be a once-in-a-lifetime or never-in-a-lifetime experience. So someone must have figured out a way to keep partially filled cans from being packaged with the full cans.

But how? Nothing really complicated, it turns out. A device shoots a gamma ray of photons through the can at just the right height, and a crystal sensor on the other side counts how many photons get through. If too many get through, it means the can wasn’t filled correctly. So the can gets thrown off the line to prevent it from joining a six-pack. Remarkable, isn’t it?

That the beam automatically detects a partially filled can is a great feat of engineering. But it also identifies which nozzle filled the can so that it can be cleaned out. Amazing.

Skeleton Staff

Only a handful of people actually work in this factory. It basically runs itself. The main job of the workers is to make sure everything is running as it should.

Here’s how well it runs. A state-of-the-art facility with two filling lines working can fill over 1.5 billion cans of soda in a year. Yes, 1.5 billion. How many people are necessary to produce those billion and a half cans? Maybe 10 or 20 people, depending on the facility and whom you count as production workers. Twenty people can take over one billion empty cans and get them filled and put on a pallet, ready for shipping.

Imagine taking everything out of the factory so it’s just a shell. Take the ten smartest people in the world. Tell them they have total freedom. What is the best way to fill and package cans of soda? Tell them they can use as many workers as they want. They can design and build any machine they want, as long as it fits in the space. Then tell them that whatever the cost of the machinery and the people they hire, it’s got to come out of the revenue they receive from selling the soda at say $3 a six-pack. Of course, that’s the retail price. They’d really have to get by on maybe $1.50.

They couldn’t do it. It would take them a millennium just to design and build the machinery, and even then, they wouldn’t get it right.

It appears to the eye that ten people produce a billion cans of soda in a year. That is what is seen. What is unseen is the labor that goes into the machinery that helps those ten workers get the job done. Think about the machine that fills the can or the one that checks if it’s full. Someone had to think of it and design it and build it and improve it. It’s more than one person. It’s an army of people. And that’s only one tiny part of what produces the can of soda you drink for a mere 50 cents.

Imagine what a soda would cost if you didn’t have that technology. Simple answer: a lot more. Imagine how many people would be working in bottling plants if we didn’t have that technology. Simple answer: a lot more.

How did it happen? Who drove the innovation in the soda business? Coke and Pepsi, of course. And others. But who decided how fast the progress would go and what innovations were worth pursuing? Who decided that the present level of innovation wasn’t good enough? Who decided how much better things would get? Who decided how few jobs to put in the bottling plant and how many to put designing the laser and the assembly line itself and even the building down to how many doors on the loading dock and how high to make the ceiling?

No one was in charge. And that is the greatest unseen phenomena, the marketplace itself. We don’t see the competition and striving that transformed the bottling plant and every aspect of the industrial world. All we see are the results.

A little over 40 years ago, Leonard Read wrote his essay “I, Pencil.” (If you have never read it, you can read it online at: www.fee.org/) In “I, Pencil” Read makes the point that no one knows how to make a pencil. He describes the vast knowledge it takes to make something as simple as a pencil. He describes the incredible coordination among all the suppliers who have to combine to make a pencil. All those people were unseen beyond the factory. Read knew that every product had armies of unseen helpers who in the background helped produce the goods that we enjoy.

Read was talking about a pencil at a particular point in human history. But as Don Boudreaux pointed out in his column last month, take any product and there is a second level of unseen helpers, those who help invent and design and produce the technology that improves the product over time.

Russell Roberts the host of the weekly podcast, EconTalk and co-creator of the Keynes-Hayek rap videos. His latest book is How Adam Smith Can Change Your Life. He is also a John and Jean De Nault Research Fellow at Stanford University"s Hoover institution.